If Starz wanted their content to be valued differently, Netflix could easily mark it as such on their site. And they'd be smart to make sure everyone knows it's branded Starz and not just Netflix, so when the snarky, "this crap isn't worth a premium, they should pay ME to watch it" comments start, everyone knows who's to blame. No content producer should dare stick out from the crowd by demanding a premium unless their content is super-premium. Whoever might have the guts to pioneer this approach, Starz ain't it.

Netflix could have turned this whole thing on its ear and used consumer ire to slap the content producers in line. Hey, we tried it your way, but look at the customer backlash! With the economy, folks are getting surly. Too bad Netflix isn't smart enough to make the surliness work for them. Still, I'm betting on them or at least their business model for the long run.

People are bailing on Netflix for not being a good enough bargain but they're bailing on the cable companies too for the same reason.

Here is the solution to both Netflix and cable/satellites woes: realize that being in the digital content business, your content value is headed for zero. This is inevitable. Start planning for it now.

The way to survive as the content heads for zero is:

1. Aggregate customers in one place for volume. This is how digital pennies become worth more than analog dollars. Splitting the market into Netflix, hulu, cable companies' proprietary systems, etc is working at odds with this approach. The idea here is that if you have a large enough audience, you can still fund your content production even if only a minority of your audience is buying anything, and the rest pay something through online ad views, which are very puny when the population is small (to which I'm sure the owners of TrekBBS can attest) but can really add up when your audience is in the millions, or, why not, billions.

2. Sell something other than content; use the content as a loss leader. This is akin to my idea to use a new Star Trek series as a loss leader to attract a mammoth population of Trekkies - millions of them globally - to a single site, where they can be monetized through ad views and selling memorabilia, videos, etc to just a small percentage.

3. Make your customers work for you. What do you sell if you're not selling content? You're selling the work that your customers are doing for you, for free. There are examples of this all over the internet. YouTube is selling the work people do making, rating and publicizing videos. Facebook is selling socializing.

Netflix has already got a start on what they could sell - the community. Their opinions, their content (reviews of movies with scenes of the movies for example), their help in organizing data (the ratings system). Netflix needs to concentrate on giving the community greater ways to create content and organize themselves into subgroups of fans.

People who rent Game of Thrones from Netflix should be monetized by herding them over to the Game of Thrones group, where the advocates for the book series are hanging out and telling everyone why they should buy the books. Netflix gets a percentage of sales from the books. There will be ads targetted at fantasy fans in general. Game of Thrones is bringing in a lot of first-time fantasy fans, who would not previously have had much exposure to that entire industry. There's all sorts of stuff you can sell them, once they've been sucked into that culture.

This can be replicated for all kinds of interest groups. Silent film buffs, Sergio Leone fans, Elmore Leonard groupies, the list is enormous. And remember, I'm talking a global audience. How many people in Jakarta have ever heard of Elmore Leonard or Game of Thrones? Or even Star Trek? The middle class is burgeoning worldwide, and suddenly they're easy to reach! Go get them!!!

But Netflix must realize that their community, not the content, is what their business will be based on in the future. They cannot afford to lose the community, and not just because of their subscriptions. The bottom line here is that what Netflix, or a Netflix successor who makes this work, is going to sell, is the free labor of their customers. The actual content - movies, TV shows - is going to continue to drop in price until much of it is literally free. But when you have a billion or two people creating content of their own, sorting info in useful ways and doing free PR, you can afford to give away content for free, just to keep them working for you.

That's the future. May as well start implementing it now. (The smart companies are.)

The people speak. Shares in Netflix dropped by almost 20% Thursday after the company said it expected to lose more than half a million subscribers in the current quarter instead of adding the 400,000 it had previously anticipated. The reason for people bailing out of Netflix is that it raised its prices. Starting this month, Netflix created one plan for its Internet streaming and another for its DVD-by-mail offerings, each of which costs at least $7.99 a month. That translates to a price increase of as much as 60% for folks who enjoy both both delivery methods. Coverage and analysis from the Los Angeles Times, Wall Street Journal and New York Times.

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The real reason people are bailing is that Netflix botched the PR, and antagonized their customers in an economy where everyone is surly. The actual price increase is hardly ruinous. I switched to 2x DVDs, still get their entire mammoth library at my beck and call, and I'm getting them fast enough that I'm seriously considering scaling back to 1x (what with the new fall season and shows piling onto my DVR faster than I can watch them), saving a big four bucks a month, which might not even be worth the effort it takes to click that option.

For context, here's an interesting article about companies that have lost out in trying to build internet businesses - AOL and Yahoo - and what lessons they hold for Netflix (by inference).

Reinvigorating a Web giant is harder than, say, reviving a drug-store chain because of the peculiar economics of the technology world, where the path to greatness is built on network effects. Apple (AAPL) became the most valuable company in the world by understanding that when people buy iPods, they’re more likely to buy music from iTunes—and then iPhones, iPads, and anything else the Cupertino, Calif., company dreams up. Google mints money because googling has become an everyday occurrence for billions of people, and they’re less likely to switch search vendors once they sign up for Gmail and start sharing YouTube videos. Facebook, too, has become an unavoidable online common where 750 million people go to hang out with their friends. All made massive investments in uncertain but innovative technologies, winning hordes of new customers while raising the entry cost for rivals to match them.

By comparison, Yahoo and AOL have tried to live by Old Media rules while masquerading as New Media powerhouses. They have been and continue to be successful at building audiences: Yahoo alone receives nearly 700 million monthly visitors. They have young users attractive to advertisers, with 43 percent of their traffic coming from people younger than 34, according to ComScore (SCOR). But unlike Google or Facebook, Yahoo and AOL earn revenues the old-fashioned way—by employing rafts of reporters and maintaining costly ad sales teams to make sure the articles and deals keep flowing. It’s a model with lots of competition. “Switching costs are pretty low for [visitors to] both of these companies,” says Citigroup’s Mahaney. “There’s no real way for them to lock in customers.”

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Lock in customers by either locking in habits, like Google does, or better yet, addicting them to something that they can't abandon - a Facebook page, a gmail account, and on Netflix, it should be the community - their status, their reputation and of course the ratings of the movies they've already created, which is a non-portable database but hasn't proven sticky enough on its own to stop people from bailing.

Social media games are a very good example of how to "trap"
people in a sticky web - players earn all sorts of virtual goodies, and can't take their goodies with them, so they're stuck forever with FarmVille or whatever because they can't bear to give up all the labor they've invested into something that doesn't even really exist. The players are spiders who are entrapping themselves in a sticky web they made themselves - brilliant!

The gist is, Netflix has lost 600,000 customers since June. Apparently far more than they had anticipated.

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From the link:

Even with fewer subscribers, Netflix expects to bring in $10 million to $25 million more from its customers than during the July-September period than it did April-June.

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24.6 million in June. That prediction was lowered Thursday to 24 million.

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So, their subscriber base dropped by less than 2.5%, and their revenue increased by between $10 and $15 million. I've got to say: that really doesn't sound all that bad for such a major pricing change.

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Except for the fact that their loss of customers were worse than they projected, for which the end result was a sizeable drop in their stock - the perils of being a public company. One article said 20% (!). If you calculate the $$$$ value of that 20% drop.... it's kind of eye opening. Also as I understand it the price increases happened late in the quarter so the entire quarter's numbers aren't representative.

edit: from temis' article above, which puts a dollar value on the stock drop...

After watching its stock fall 19% yesterday following the disclosure that it was losing subscribers for the first time in years, the online video and DVD-by-mail company's shares took another beating Friday, dropping an additional 8%.
In total, Netflix has lost 26% of its value, or about $2.8 billion in market capitalization, over the last two days.
After announcing a controversial price increase in August, Netflix had told investors to expect that it would gain 400,000 subscribers in the current quarter. Instead, chief executive Reed Hastings said yesterday that it expected to lose 600,000 by Sept. 30.

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So, is +$15 million (some of which was made before the price increases) worth -$2.8 BILLION in value?

I'm still getting over Netflix's prediction that they would be +400,000 after their price increases. Really now? That's arrogance. I thought everybody understood and expected some level of subscriber drop, whether minor or major, with the expectation that the increased rates would cover the loss... Telling your investors you're going up 400k... then instead losing 600k... customers speak indeed.

The gist is, Netflix has lost 600,000 customers since June. Apparently far more than they had anticipated.

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From the link:

So, their subscriber base dropped by less than 2.5%, and their revenue increased by between $10 and $15 million. I've got to say: that really doesn't sound all that bad for such a major pricing change.

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Except for the fact that their loss of customers were worse than they projected, for which the end result was a sizeable drop in their stock - the perils of being a public company. One article said 20% (!). If you calculate the $$$$ value of that 20% drop.... it's kind of eye opening. Also as I understand it the price increases happened late in the quarter so the entire quarter's numbers aren't representative.

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Don't get me wrong. They screwed up in the expectations game, but that doesn't change the fact that a major pricing change led to a relatively small drop in customers and an increase in revenue. As noted up-thread, the situation could grow worse, but, at the moment, it seems their biggest problems have more to do with investor panic than customer loss.

Yep. I received an email with the same information. For myself, this is perfect. Netflix streaming can go about getting more specialized, and Qwikster DVD by mail can hone in on their own specialization. Mainly, though, I'm just glad Mr. Hastings finally talked to the customers instead of at us.

Guess they were done with that foot, and moved on to taking potshots at the other foot? I guess spinning off to another company shows us how cheap each plan is, by having two small charges on the bill every month instead of one larger one?

This resulting in 2 separate queues is the crappy part, IMO. Even if they were charging separate fees, nice to have that integration between the two services. Now they aren't even the same company anymore...

I don't think they've done themselves any favors by breaking these two components into separate websites. If they're going to push me to a new website for my DVD queue, maybe it's time to take another look at Blockbuster's service.

I'm not sure how diluting your established business name is a good business move.

Not keen on the "Qwikster" name. I'm already seeing people spelling it "Quickstar" and I'm betting a few people find themselves staring at the Amway website in bafflement (Quixtar). They could have just called it Netflix By Mail. Or Netflix II: The Revenge. Or Netflix Old School...or...something...

Not keen on the "Qwikster" name. I'm already seeing people spelling it "Quickstar" and I'm betting a few people find themselves staring at the Amway website in bafflement (Quixtar). They could have just called it Netflix By Mail. Or Netflix II: The Revenge. Or Netflix Old School...or...something...

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Yeah I just don't get this part at all. Netflix is an established, successful business that started as a DVD business, and has an established brand name identity with the public. Why eff with that?

The price hike thing was understandable (to me at least) but this name change thing is just stupid. Apparently I am now a Qwikster subscriber. Joy. PS- I wonder if they had to license that name from Nestles. Perhaps they should use a colorful cartoon rabbit in their promotions.

Not keen on the "Qwikster" name. I'm already seeing people spelling it "Quickstar" and I'm betting a few people find themselves staring at the Amway website in bafflement (Quixtar). They could have just called it Netflix By Mail. Or Netflix II: The Revenge. Or Netflix Old School...or...something...

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Yeah I just don't get this part at all. Netflix is an established, successful business that started as a DVD business, and has an established brand name identity with the public. Why eff with that?

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Maybe they decided the "Netflix" brand has been wrecked and they really want to save the DVD business, so they're giving the DVD side a new name so people won't think, "Hey, that's Netflix, those bastards!"

I think Netflix's long-term goal was always to move into streaming and eventually drop the DVD-by-mail business model, hence the separation. "Qwikster" is awkward, though, because there's no tie to its old company. Maybe "Qwikflix" would have been better. The name would still look awful, but at least it's got the "flix" connection.